What Thailand can learn from Mexico on energy reform

Economy March 20, 2017 01:00

By THEPCHAI YONG
THE NATION

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AS HAS BEEN done for almost 80 years, Mexico last Saturday commemorated the so-called “Oil Expropriation Day”, a national holiday marking the nationalisation of the Mexican oil industry by the government of President Lazaro Cardenas in 1938. But this year’s celebration was particularly at odds with the energy reform that is taking hold in the oil-rich country.

Prior to the expropriation, Mexico was the world’s second largest producer of oil. Back then the oil industry in Mexico was dominated by foreign oil companies, which were accused of exploiting the country’s resources and were an object of widespread resentment. Declaring that all mineral and oil reserves found in Mexico belonged to the government, President Lazaro Cardenas signed a decree that expropriated the facilities and assets of all foreign oil companies and later created Petroleos Mexicanos (PEMEX) as a state-owned firm that was to have monopoly over the country’s oil industry.

So for decades, March 18 was considered a day of pride by Mexicans who believed that they had become a master of their own national resources. A monument to commemorate the oil expropriation was even erected in the centre of Mexico City where the historical event has been celebrated annually.

But this year’s celebrations took place against the background of a historical reform initiated by President Enrique Pena Nieto in 2013 – to put an end to the energy industry monopoly that has seen Mexico plunge from being a major oil exporter to becoming a net oil importer. The monopoly of the state-owned PEMEX shut out all foreign investments, has led to inefficiencies and declining production to the point that the once one of the world’s biggest oil producers had to face fuel shortages and had to depend on oil imports.

Opening up the energy sector is part of a wide range of structural reforms undertaken by President Pena Nieto that also cover telecommunications, education, taxes and finances. The reforms were made possible by a cross-party agreement among Mexico’s three major political parties that voted to have them written in the constitution. They were designed to make Mexico more competitive and to drive economic growth in the world’s 15th biggest economy. Mexico is three times the size of Thailand and its population almost twice as much.

The reform took its giant step in December last year when for the first time in the country’s history many of the world’s top oil companies took part in the bidding for deep-water blocks for oil exploration in the Gulf of Mexico. Biddings for on-shore and shallow-water exploration and development blocks held earlier also attracted enthusiastic international participation.

Deputy Energy Secretary Aldo Flores Quiroga estimated that investments resulting from these explorations and production should top US$49 billion and create 450,000 new jobs – something that was unimaginable under the monopoly of PEMEX. Flores Quiroga credited “political leadership” for making the reform of the energy sector possible.

But the reform is not without side-effects. An immediate result of the reform was an end to fuel subsidies and a sudden spike in gasoline and electricity prices. In early January, as long queues of cars formed at petrol stations, angry demonstrators blocked highways and looted shops in protest against the 20-per cent rise in gasoline prices. Non-governmental activists opposed to the reform have branded the privatisation of the energy industry as a concession to American business elite.

Despite the widespread anger, Flores Quiroga believed the majority of Mexicans understood the need for reform but admitted the government needed to do a better job in communicating with the public on the benefits. The government, he said, was trying to alleviate the plight of the people by ending the fuel subsidies in stages.

If the strongest support for energy reform comes from politics, it’s also politics at the opposite end that could pose a potential challenge to it. Andres Manuel Lopez Obrador, a two-time presidential candidate, has threatened to reverse the process of opening the energy industry and vowed to reinstate energy subsidies if he is elected president in next year’s election. For many, the fact that Lopez Obrador, the populist leader of the left-wing National Regeneration Movement (MORENA), is leading in most polls is a damper on the enthusiasm for reform.

Not easy to undo reform

It was Lopez Obrador who in 2013 sent an open letter to Rex Tillerson, then CEO of ExxonMobil, warning him against investing in Mexico’s oil industry. But ExxonMobil went ahead to be among the world’s biggest names in the oil industry bidding for the deep-water blocks.

Despite rhetoric from politicians like Lopez Obrador, Flores Quiroga believes that since the reform is constitutionally enshrined and supported by all three major political parties, it cannot be easily undone. His views are strongly supported by executives at the National Hydrocarbons Commission (CNH), whose responsibilities include conducting public tenders and signing contracts for exploration and production. “They may try to put up obstacles but they cannot possibly reverse the reform which is written in the constitution,” said Carla Gabriela Gonzalez Rodriguez of CNH,

Was Mexico’s decision to nationalise the energy sector a mistake? And for countries like Thailand, where there is a movement calling for a national oil company to take charge of the country’s energy resources, what should be the lessons from Mexico’s experience?

Flores Quiroga believes that the Mexican expropriation of foreign oil companies in 1938 probably made sense under the prevailing circumstances when there were abundant oil reserves and production capacity. The expropriation was also made necessary by continuing disputes between the Mexican government and the foreign oil companies. He admitted that the government’s primary intention at the time was to create a national oil company PEMEX but made a mistake of allowing a monopoly and barring foreign oil companies from the country.

With the legacy of the 1938 oil expropriation practically unravelling, does Flores Quiroga think the annual celebration of the event is still relevant? “Yes, we will continue to celebrate. Consider it as a celebration for another independence day for Mexico,” he said.

Note: This article is a result of a recent visit of a group of Thai journalists to Mexico City, organised by the Petroleum Authority of Thailand (PTT). PTT executives believe Mexico offers a classic lesson on energy reform.